Consumers have grown accustomed to using credit cards to purchase goods and services. Although credit cards provide significant advantages and convenience over cash transactions, various costs are associated with credit card transactions. A major factor in determining the cost of a credit card transaction is risk, and particularly, the risk of fraud. These costs may be imposed upon merchants and consumers in the form of use charges, annual fees, and/or higher interest rates.
There are several different ways in which a consumer can purchase goods or services using a credit card, each of which has a certain amount of fraud risk associated with it. In the traditional credit card transaction, the consumer (the credit card holder) is present at the merchant's (provider of goods or services) place of business and physically presents the card to the merchant when paying for the goods or services. The consumer physically signs a paper receipt confirming the transaction. Another common type of credit card transaction type is mail order or telephone order. In this scenario, nothing is physically signed by the consumer, and the credit card is not physically present at the merchant. Consequently, this type of a credit card transaction generally involves a greater risk of fraud than an in-person transaction. Another type of credit card transaction which recently has become much more common is the online (Internet) purchase. In this case as well, nothing is physically signed by the consumer, and the credit card is not physically present at the merchant. Although substantial progress has been made in the areas of data encryption and Internet security in general, this method of payment is still viewed by many as involving the greatest risk of all the types of credit card transactions.
The parties potentially affected by credit card fraud include the consumer (the credit card holder), the provider of goods or services (the “merchant”), the issuer (the bank which issued the credit card), the acquirer (the bank which directly interfaces with the merchant for purposes of processing a credit card transaction; often the same entity as the issuer), and the clearing network (e.g., MasterCard or Visa). These parties may be exposed to fraud in any of several ways. First, a criminal posing as a credit card account holder may make fraudulent purchases on a stolen credit card account number. Currently, the point of origin for most of the fraud risk associated with a credit card is at the transition where the credit card is delivered from the issuer to the consumer. In addition, signatures may be forged, enabling a criminal to impersonate a legitimate credit card account holder. The transaction can be completed even if the merchant fails to check the signature or back up identification of the consumer. Furthermore, an acquirer must trust the information it receives from the merchant. Consequently, a criminals posing as a merchant may run transactions on a stolen credit card number. Also, a criminal working for a legitimate merchant may falsify the amount of the legitimate purchase. The transaction can also be completed even if the consumer does not verify that the transaction is for the correct amount, enabling a criminal to run a fraudulent transaction amount. In addition, a consumer may repudiate a valid transaction. In the online scenario in particular, is very difficult to prove that the consumer approved the transaction.
Credit card fraud creates expense for credit card networks, their banks, and consumers. Reducing the incidence of fraud in credit card transactions will help to save money and, in turn, to reduce use charges for merchants and consumers and enable new credit card services. A new credit card payment system, therefore, should work within, and preferably improve upon, existing risk tolerance levels and other constraints associated with more conventional credit card transactions.
Furthermore, a new credit card payment system should not require significant added hardware or changes to existing merchant credit card authorization/clearing procedures, or require significant effort or training for merchants and consumers.